Your Home – A Retirement ATM

Most people – experts included – don’t have clear concept of the cost of retirement. Everybody is underestimating a number of things including longevity and the cost of living longer.  Of all the assumptions made in financial planning (inflation, rate of return, tax brackets, etc.), your life expectancy is probably one of the biggest of all. Using the wrong number can be detrimental.

Investors haven’t been too happy about employer sponsored retirement plans, such as 401(k) accounts. A combination of hidden fees, lousy investment choices, and bad returns have thrown retirement savers for a loop.  Many have tried to save and at one time invested in the stock market, but it’s all been depleted.

Job insecurities, layoffs, stock market losses and a trend among many companies last year to freeze 401K contribution matches.  Near retirees have downsized and cut expenses and are doing everything they can to set money aside, but every time they do something unforeseen comes up.”

The economic downturn is not entirely to blame. While declining home values and mounting job losses are part of the equation, many residents were cultivating bad financial habits well before the recession.

Many Baby Boomers are discovering that they will need to tap home equity, not bequeath it.  More and more Americans will need to use their home as a retirement ATM, wiping out a key component of many estate/inheritance plans.  Protecting home equity may be a luxury that future retirees can ill afford as Social Security replaces a smaller share of pre-retirement incomes and people rely increasingly on meager 401(k) balances rather than on traditional pensions.

People have this incredible tendency to defer pain as long as possible. This is just another indication that if you give them the choice to procrastinate, they definitely do.

It is becoming abundantly clear that as individuals we have to take more responsibility for our own retirement planning. It will not be enough to rely on employer pension schemes (where many people are only making minimum contributions and most final salary schemes are closed to new entrants) or indeed government support.

Every investor would like to increase their income without compromising their stability. Maybe that’s why Equity Indexed Annuities (EIAs) have become so popular, because of their promise of providing a stable income stream. Only an insurance Annuity can guarantee to pay for a lifetime, no matter how long that lifetime lasts.

Indexed annuties meet 2 objectives: growth and stability, with the same investment. By combining the use of both, the risks balance each other and you get the rewards of both. 

An indexed annuity allows consumers to benefit from growth in the market without the risk of direct investment in the market. It guarantees that principal will be protected because the account value increases as a result of positive index performance, but never loses value due to market downturns.

An indexed annuity is particularly suited for retirement planning as it provides consumers with the potential for increased earnings while protecting against downside risk, something that may not be available with other fixed income investments. 

When the index shows a positive performance over the particular indexed account’s one-year segment duration, “index credits” that are based on that performance are added to the account value. Unlike direct investments, the account does not lose any value when the markets go down because the index credit can never be negative — keeping the account value intact.

An immediate annuity, however, does something that other investments can’t: it guarantees a lifetime stream of income that won’t run out as long as you live. As a way to handle longevity risk, therefore, immediate annuities do a great job.

There are safety choices available, but these guarantees do reduce the payments from the lifetime, no-period-certain choice.

• Period-certain – The annuitant collects for life, but a beneficiary would receive the balance of the chosen minimum number of payments.
• Cash-Back –The annuitant collects for life, but payments must continue to a beneficiary until the total contribution has been received.
• Joint-Life and Survivor Income – provides a level of income while a couple lives, then reduces after either death, for the lifetime of the survivor.

If you find that you need a steady stream of additional income.  An your savings and investments are not large enough to cover the shortage for the rest of a lifetime.  An annuity is a necessary consideration to help you achieve the desired income.

There are different types of annuities:

1. Immediate Annuity – the first income payment begins within 30-days of purchase
2. Deferred Annuity – the first income payment begins over 30-days from purchase
3. Tax Non-Qualified Annuity – contributions do not give a tax deduction
4. Tax-Qualified Annuity – may give a tax deduction for the year of contribution (see a tax professional). Tax-Qualifieds are further broken into
5. ROTH IRA (contributions were income taxed, but the interest will never be taxed. The account is allowed to accumulate past age 70½).
6. Traditional IRA (contributions are tax deferred, listed as a credit on line 32 of the IRS Form 1040. The account accumulates tax deferred but withdrawals are taxed. The hope is that the tax bracket is lower after retirement than when the contribution was made. Withdrawals must begin by age 70½.)
7. Fixed Annuity – The account earns investment results, like any interest-bearing account. Most fixed annuities pay at least a guaranteed minimum return (interest), no matter how bad the economy is. The value can never be less than the sum of the contributions.

All annuities use the same funding vehicle to accumulate contributions. Contributions can come from regular payments made each month over a lifetime. A large contribution can come from anywhere; a 401 (k) retirement, and IRA rollover, an inheritance, or a cashed-in a stock. Tax-Qualified annuities have maximum yearly contribution limits, so larger deposits may need to be split between them and a Tax Non-qualified annuity.

Some scary statistics from the Employee Benefit Research Institute study showed that a 65-year-old today would need to have socked away at least $122,000 to have a 90% chance of fully covering his or her future healthcare costs.  So check if you’ve saved and invested enough for your retirement. Make sure to factor additional costs in and try to become properly insured to cover the extras (long-term care, etc.) Otherwise, as you reach the century mark you may easily run out of money.

The bitter truth remains that the Twenty-First Century is undoubtedly an economically evil era. Times are perpetually changing for the worst and job security is virtually a thing of the past.  A stable nest egg in this day and age of global recession and heavy losses is critical.

De-Risking Investments With Annuities

There is no problem with the approach of building one’s own investment nest. We all know that there is a growing need in this country to take our retirements into our own hands if we want the funds necessary to have any quality of life upon retirement.

Personal pension plans (annuities) are among the most highly recommended investment options for you to stay happy and comfortable even during your days of retirement.  The personal pensions are for anyone and everyone who dreams of a financially hassle free life in the twilight years of their life when they will not be in a position to earn much.   

Annuities are precisely the instruments that help you transform the value of your investments into a periodic source of income. You also have an option to choose a plan that offers lifelong income or even a plan that provides you income for certain period of time.

Annuities, particularly fixed or indexed annuities, are a good way for people to go when looking for a conservative option to put money away to sit and grow particularly for folks planning on using this for retirement living.  The problem is that money is such a limited commodity in this world, we are living longer than ever before, and we are enjoying much more mobility in our golden years than in times long past

In the world of life-expectancy statistics, there’s a motto:  The longer you live, the longer you’re likely to live.  Many retirees misread the statistics for life expectancy.  Often, they focus on the life expectancy at birth, which for a man born in 1945 was about 72 years and for a woman, 77 years, according from data from the Social Security Administration.

But the averages are depressed by those who die retatively young.  Today, for a 65 year old couple, there’s a 50% chance that at least one spouse will live past age 92.  For a 70 year old couple, there’s a 50% chance that at least one spouse will live past age 93.  For a 70-year-old single man, odds are in favor of living past age 87 and a for a woman, past age 89.

Retirees have a tendency to overestimate the returns they can earn on their investments, especially once they start withdrawing money from their portfolio.  When approaching your retirement you may find that there’s no one-shoe-fits all answer to where and/or in what you should invest your money.

Many people who have taken their lump sums from their 401k’s or IRA’s didn’t manage it wisely.  Some weren’t prepared to receive large amounts of money. They got overwhelmed with the delusion of wealth and became careless and lost their retirement funds.  What a predictment to find yourself in after you retire.  What are the options?

For those retirees looking for exposure in equities, your retirement portfolio may be comprised of direct investment in stocks, mutual funds or equity indexed annuity plans:

• Leveraging the capital markets alone for building a retirement corpus is not advised as capital markets are subject to high volatility.  It is recommended to De-risk your portfolio from the volatility of the market by reversing the asset allocation you had in the initial years of savings.   One should slowly shift funds from riskier assets towards less-volatile assets is the goal of most retirees. .
• With Mutual Funds the liquid nature of these investment instruments could prove a deterrent to long-term planning as there might be a tendency to use the corpus for other life-stage needs, compromising retirement planning and lifestyle.
• Fixed annuities help you keep away from adversities of fluctuations of stock market rate;  Equity indexed annuities are good for those that want to keep up with inflation but still require safety. One of the main reasons for purchasing a life annuity is to receive a monthly income for life without the risk of losing money on investments.  

Most people use equity indexed annuities as a deferred contract, but you can use an equity indexed annuity as an immediate annuity also. The difference between the two is the time when you take payment. On a deferred contract, you expect a payout later, or never in some cases and the funds go to a beneficiary. In an immediate annuity, you begin a stream of income right away. An immediate annuity is excellent for someone that wants payments for the rest of their life, no matter how long they survive.

These retirement annuities increase in value when the market rises but they don’t lose money if the market drops. Instead, they receive a fixed interest rate promised in the contract. While not all equity indexed annuities are ties to the same type of index, many use the S&P 500 as their benchmark.

There is a price for the investor to pay when they use this type of retirement annuity . Since the company takes all the risk, they also get some of the reward when the market rises. Often contracts vary in the amount of the market growth that the company gives to the owner of the annuity. These are the annuity’s participation rates. Some companies offer as high as ninety percent of the growth while others offer as little as fifty percent.

However, if you think that the ninety percent is always the best deal, think again. Often the contracts with the lowest percentage of market participation make up for the difference by offering a higher guaranteed interest rate. If your contract runs during periods of extended down markets, the lower participation rate may actually pay higher because of the number of years the product used the fixed rate to calculate the return.

A central issue with annuities is the way they are paid out. If you purchase, for example, a $100,000 annuity, that’s how much you pay. No additional fees or commissions are charged.  The monthly benefit you then receive is computed on a combination of factors, including your life expectancy, how big the purchase was and the interest rate index that determines the benefit amount. There is no middleman between you and the annuity provider.

The annuity pays you a portion of your own money every month which is partially tax free in that your basis is non-taxable. If you live long enough, you will receive more than you paid in. If you die early, you “lose,” in a sense — although you would have had the peace of mind of receiving a monthly check throughout your lifetime.  However, to address this issue, most take a period certain payout, 10 or 15 years are normal.

Annuities are ideal programs that may help you to accumulate money on tax-deferred basis. Personal annuity pensions are considered as a significant source of financial help for retired individuals as it provides a steady source of income after the event of retirement.  The first and foremost benefit is that it offers guaranteed income for a lifetime after retirement of the investor on low risk basis.

Annuities Offer Income Stability

We recognize that the current generation of retirees and baby boomers face a unique set of retirement income concerns.  If you are nearing the age of retirement, or if you have recently retired, you are faced with many decisions on how to continue to live your life without worrying about money. 

Most retirement plans significantly affect today’s changing market. This is one of the things that makes the asset allocation so much important for a successful retirement investment. Those of us who prefer to not run out of money before we die should consider additional factors. There is no escaping old age but those who plan for it financially could ease the process considerably.

•How much retirement income will come from guaranteed sources such as pensions, annuities or social security? The greater your percentage of overall guaranteed income, the better.  If the challenges faced by many present-day seniors is any indication, quality of life is likely to become even more directly tied to one’s ability to finance it.

•Will any guaranteed source of income keep pace with your inflation let alone someone else’s ever-changing definition? Your portfolio will have to do double time if not. It is important to divides costs into two other groups: Discretionary and Essential. 

Defined-benefit pensions, Social Security payments and annuity income would fall under lifetime income sources. They would be used to pay essential expenses, including food and housing.

Meanwhile, income from assets — a 401(k), an IRA or taxable income — would cover discretionary expenses.

•How long will you live? I would not want to bet my retirement lifestyle that living to age 100 was out of the question. Average lifespan means many people live a lot longer. The average 65-year-old man has a 50% chance of living to 85 years, and average 65-year-old woman likely to live for 88 years. This means that more than 20 years of retirement – or more than half the length of an average career.

•Are you able to adjust spending significantly enough to allow for any decreased portfolio values to recover? This assumes that you have a buffer in the size of your portfolio or that you have plenty of discretionary spending.  Key considerations for pre-retirees and retirees are to develop a financial plan based on the estimates of expenditure and resources, and develop a plan to extend the life of your assets.

•Are you able to consistently stay invested? A 3 percent certificate of deposit or bond coupon may be part of a prudent plan but may not allow you to consistently keep pace with your inflation.  Equity Indexed annuities offer consumers what could be described as the best of both worlds. A market based investment with potentially attractive returns plus a guaranteed minimum return.

Finally, I would be remiss if I did not point out the elephant in the room. Do you really know what your actual expenses are in retirement, and do your actual expenses take into account periodic large purchases, such as vehicles, vacations or a new roof?

Retirement Annuities are an investment, which can offer an income you cannot outlive and provide a solution to one of the biggest financial insecurities of old age, the fear of outliving one’s income. This is one option that makes sense because it is a “guaranteed annuity.” This is when a person is paid a guaranteed flow of money (based on an agreed investment) that provides a regular income for as long as they live. 

This option offers peace of mind. You know that whatever happens in the economy, you will continue to receive a steady income.

Annuities also provide a decent interest rate as well as tax deferral benefits which makes it a competitive alternative to banks. Additionally, remember it also provides a guaranteed income.  With an annuity, you have guaranteed stability.  

Annuities enable you to put away some funds while you guarantee your post retirement funds. These annuities will grant you another source of income.  Annuities do not require any upfront fees. Because of that, the insurance company will require a lengthy term of investment.

Death Benefit Payouts

Studies show that over that approximately three-quarters of us who have life insurance do not have adequate coverage levels for the stage of life we are in. It is important to review your policy as your life changes to ensure that your coverage is sufficient for your new needs.

Life insurance needs may not be as high as they are at other stages in life for those that are newly retired. But, it is also true that most new retirees do need to think about maintaining an adequate level of coverage.

Consider your children or spouse you may leave behind. Even though your children may be grown and on their own, and your spouse may be able to live comfortably on his or her retirement savings, there are many special circumstances in which they may find themselves in financial trouble if you were to pass, or vice versa, you if they were to.

If you are very ill before you pass away, you will incur many health costs, many of which may be passed on to your spouse or children if you pass away. Many seniors may have to live with a child if they are on their own and need help, and this may put a financial burden on the affected family members.

 There are also funeral costs to consider. It is important to ensure that your family members can recoup any financial losses after you pass away.

Term Life Insurance Policies vs. Whole Life Insurance Policies

There are two basic types of life insurance: term life insurance, where you choose the coverage amount and length of the policy, and whole or permanent life insurance, which combines an investment product with life insurance.

Term Life Insurance Policy Advantages

Term life insurance policies are easy to understand. You pay a low, fixed monthly premium based on the term life insurance policy term length and amount of coverage you choose. You can choose term lengths such as 10, 20 or 30 years, and life insurance coverage amounts anywhere from $100,000 to several million dollars.

Whole life insurance is often expensive, due mainly to its investment aspect, while a term life insurance policy is usually very affordable. Whole life insurance policies often cost thousands of dollars a year, as opposed to the mere hundreds of dollars a year that the majority of term life insurance policies run. 

However, term insurance is purchased with the “IF” you die concept, whereas whole life insurance is purchased for “WHEN” you die.  Should you live past the policy period of term insurance you could very well die without coverage.  Whole life insurance provides coverage until the day you die.  We always recommend having a enough permanent coverage to pay for the last expenses. 

The first step
When a loved one has expired and the funeral formalities are finished, the beneficiary needs to submit a certified copy of the death certificate to the insurance company. The death certificate is a must in order to file an insurance claim. Instead of contacting the insurance company, contact the agency or agent that sold the policy to the insured. Numbers of both the agent/agency and the life insurance company are usually found on the policy itself. The agent will help you understand the procedure better, and will ease the process for you in your time of grief.

Death benefit payout options
When your claim has been filed and approved, the life insurance company will ask you how you would like to receive the death benefit amount. There are two main payout options:

Lump Sum
Almost every term life insurance policy allows you to withdraw the entire death benefit amount in a lump sum. Most beneficiaries opt for this payout plan if there are pressing financial commitments like loan payments or an urgent need for the entire amount. Some beneficiaries prefer to withdraw the entire amount, and then direct it to tax-deferred investment vehicles.

Annuity Methods

For those who do not wish to receive the death benefit in a lump sum, life insurance companies offer several types of annuity (yearly) payout options depending on how you want to receive the amount.

These include:

1. Life income: The beneficiary is guaranteed an annual income as long as he or she lives. The insurance company determines the payment amounts based on the age and gender of the beneficiary. If the beneficiary dies, the insurance company retains the balance amount.
2. Life income, period certain: The beneficiary is guaranteed an annual income for life, or a specified period of time, whichever is longer. If the beneficiary dies before the specified period, his or her beneficiary i.e. a second beneficiary receives the outstanding payments.
3. Last survivor income: If there is more than one beneficiary, life payments will be made until the last surviving beneficiary dies.
4. Specific Income: The beneficiary gets to choose how much and for how many years death benefits will be received, until the entire death benefit is exhausted. If the beneficiary dies before the last payment, his or her beneficiary receives the remaining payouts.
5. Interest income: This is a great option for minor beneficiaries. The beneficiary is guaranteed payments on the interest paid on the death benefit for a specified time, or until the beneficiary reaches a certain age. The original benefit is then made available to the beneficiary.

Always think your options through

Before choosing a payout option, evaluate your financial needs to determine which option is best for you. It is always wise to speak to a financial advisor or a tax consultant. Though the payment options are relatively simple and easy to comprehend, it is wise to understand them thoroughly and know the implications of each kind of payout method.

Beneficiaries must be aware that though the lump sum benefit is tax-free, all interest amounts received on the lump sum are taxable.